By Hank Boggio, Senior Managing Director & Chief Revenue Officer of PEF Services LLC
For CFOs who need to keep pace with the demands of regulators and investors, manage administrative costs, and carve out time for more strategic activities, outsourcing fund administration is an option worth exploring.
According to eVestment research, the size of alternative assets under the administration of a third party grew by $2.5B in five years. Of all the duties the back office must perform, fund administration has changed the most over the past 10 or 15 years.
Many firms begin to consider outsourced solutions only when performance or resourcing issues begin to impact the firm negatively—an approach that can result in a decision made under pressure.
Taking a proactive approach and recognizing emerging issues before they become critical gives General Partners time to evaluate their options thoroughly and make a more informed decision.
The decision to outsource fund administration is usually motivated by one of six key issues, each of which will be explored below.
Alternative investment firms see bigger opportunities on the horizon and are preparing to meet them. In response, growth is perhaps the single biggest factor in the decision to outsource, yet many firms fail to recognize the point at which their growth trajectory exceeds the ability of their back office to keep pace. Virtually every firm will experience a pivotal point beyond which the firm’s existing staff can no longer stretch to accommodate growth.
An in-house team that has successfully supported Funds I and II may suddenly find themselves struggling to prepare for subsequent fund launches and support the ongoing administration and reporting requirements.
Firms of all sizes are struggling to keep pace as investors demand greater access to investment data than ever before. The firm’s ability to meet complex investor reporting requirements has become integral to the firm’s ability to attract future investment.
ILPA raised the bar considerably when it comes to the levels of communication and transparency required, the array of financial data expected, and the frequency with which it is expected, and those standards have transformed investor expectations and back-office workloads. As a result, reporting capabilities have become the most important selection criterion for a growing number of investors.
Turnover can be high in the back office, and firms are seeking ways to mitigate the impact. According to a recent EY report, 47% of CFOs rate talent management as a top strategic priority, making it an issue second only to asset growth, and more important than cost management or risk mitigation.1
As talent becomes an increasingly scarce commodity, back-office turnover can be one of the greatest threats to productivity and reputation and a significant point of vulnerability. Devastating at any time, the effects are heightened when a staff member leaves prior to a reporting period, resulting in not just a loss of capacity, but also of vital continuity.
Fierce competition for investors has led firms to explore new ways to attract capital. Across the board, and especially in the bulging middle market, firms are looking for ways to stand out and attract the capital they need. The competition for investor dollars is intense, and General Partners must cover all bases to appeal to investors.
Outsourcing fund administration sends a clear signal to investors that the GP is committed to operational excellence and supports the highest levels of transparency, diligence, accountability, and control.
As the demand for specialty investments grows, so does regulatory and reporting complexity. That extra layer of complexity can significantly increase the amount of time and effort required to administer the fund, and it may also require specialized expertise that an in-house team doesn’t possess.
The right fund administrator can provide senior-level expertise for a specific fund strategy or situation, bringing years—or even decades—of experience to the table, and giving your firm access to guidance on demand.
Technology is a key benefit derived from outsourced fund administration. It provides a level of control, intuitiveness, and transparency, through a central repository for current and historical fund administration data.
An investor portal delivers an interactive, data-driven experience including advanced data visualization and secure real-time access to underlying source data of the fund.
1 EY, Operational Excellence: One Path or Many? 2018 Global Private Equity Survey.